Trading Forward in an Imperfect Market: The Case of Electricity in Britain

Andrew Powell

Economic Journal, 1993, vol. 103, issue 417, 444-53

Abstract: The thrust of government policy in the British electricity industry has been to create a competitive and transparen t commodity market. To this end there has been a separation of supply from distribution and an independent company operates a transparent spot market, known as the pool. However, there is also a set of futu res and options-style contracts which lie over the pool that are not transparent. This paper considers the effects of the contract market on the pool. The model is an application of the theory of futures-style trading when the spot market is imperfect. However, the model is somewhat non-standard as there is no secondary trading in the contra cts and the generators may capture rents in the contract market. The results suggest several externalities due to the strategic use of th ese contracts by both the generators and the RECs which may limit the number of contracts traded. It is argued that the Office for Electricity Regulation (Offer) should intervene to help the creation of a transparent and standardized contract market. This may ensure the success of the contract market, ease entry to generation and foster competition. Copyright 1993 by Royal Economic Society.

Date: 1993
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